The “greatest” carry trade ever? Understanding eurozone bank risks

Viral Acharya and Sascha Steffen

Journal of Financial Economics, 2015, vol. 115, issue 2, 215-236

Abstract: We show that eurozone bank risks during 2007–2013 can be understood as carry trade behavior. Bank equity returns load positively on peripheral (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) bond returns and negatively on German government bond returns, which generated carry until the deteriorating GIIPS bond returns adversely affected bank balance sheets. We find support for risk-shifting and regulatory arbitrage motives at banks in that carry trade behavior is stronger for large banks and banks with low capital ratios and high risk-weighted assets. We also find evidence for home bias and moral suasion in the subsample of GIIPS banks.

Keywords: Sovereign debt crisis; Banking crisis; Risk-shifting; Regulatory arbitrage; Home bias; Moral suasion (search for similar items in EconPapers)
JEL-codes: F3 G01 G14 G15 G21 G28 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (427)

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Working Paper: The "Greatest" Carry Trade Ever? Understanding Eurozone Bank Risks (2013)
Working Paper: The "Greatest" Carry Trade Ever? Understanding Eurozone Bank Risks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:115:y:2015:i:2:p:215-236

DOI: 10.1016/j.jfineco.2014.11.004

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